§ Order read for resuming adjourned debate on Question [19th June], That the Bill be now read a Second time.
§ Question again proposed.
§ 11.45 p.m.
§ Mr. John Nott (St. Ives)
It is with great regret that I break into the nostalgia induced by the last few minutes of the debate on the Decimal Currency Bill. I am afraid that from discussing the relative merits of a 2.4d. unit and a farthing unit we have to come to an issue involving £900 million. I can only say that I find it rather unfortunate that we should have had this debate initiated on a Monday morning and that after some 12 hours' sitting in the House we are now trying to complete consideration of this very important Bill at nearly midnight. I feel that the Public Works Loans Bill, which is one of the few opportunities we have to discuss local authorities' capital expenditure and borrowing, should be debated 1897 during a normal afternoon's business and that this is not really a good time to complete the business on this Bill.
When we adjourned on Monday morning, I was just starting to follow my hon. Friend the Member for Finchley (Mrs. Thatcher) in what she stated about the radical change which is being made in the old criteria under which local authorities could go to the Public Works Loan Board and the new criteria of 34 and 44 per cent. of net capital expenditure. I shall not mention this matter again. I want to pass on and to try to keep my remarks brief, because I know that the House wishes to adjourn.
It is true, I think, to say that the amounts which will be forthcoming from the Public Works Loan Board for local authorities in the current year will be slightly less than they were last year, and I personally regard this as being a trend in the right direction. I cannot see any justification whatsoever for a form of P.W.L.B. lending which subsidises rates of interest. I welcome the trend back to the market and away from the 1963 White Paper and to a system whereby the local authorities pay current market rates of interest.
When people criticise the scramble for money which goes on among the 1,500 or so local authorities in the market, they are not in fact criticising the system of market borrowing by local authorities but are making a criticism of the structure of local government. If the Royal Commission were to suggest a structure whereby there were 40 or 50 first-tier local authorities with greater powers to raise revenue and to meet expenditure, the problems which now exist for many small authorities in competing with one another in the market would no longer exist. Therefore, the criticisms which are now made of market borrowing by local authorities are very much a criticism of the present structure of local government, rather than a criticism of their going to the open market for their money.
I pass on to one or two remarks made by my hon. Friend with regard to Report No. 34 of the Prices and Incomes Board on bank charges. I regard this—I am going to refer to the local authority aspects of it—as being in parts one of the most ludicrous Reports which the Prices and Incomes Board has yet presented. We are discussing local authori- 1898 ties here, but this whole recommendation surrounding the endowment profit seems to me quite ludicrous, because who is Mr. Aubrey Jones and his consultants, to say what normal profit is when Bank Rate is at 5 per cent. and not at 7 per cent.? The remarks about liquidity ratios are also very strange, because these are controlled by government monetary policy. I shall be interested to see what happens when the banks really start competing and going to the Chancellor and asking if they can issue negotiable certifiscates of deposit.
In paragraph 188, Mr. Aubrey Jones makes certain criticism about the level of bank charges to local government. And this concerns the whole question of interest rates, which we were discussing at our Monday sitting. It is reasonable that local authorities should pay per cent. more for their money from the banks than is paid by the nationalised industries, and I do not see that Mr. Aubrey Jones has considered in depth the whole question.
It is true that the security of nationalised industries and local authorities is largely the same—and the question of security was discussed—but local authorities are not such good customers for the banks as the nationalised industries. When sterling crises arose in earlier years. we all know local authorities which had not been for accommodation to banking houses for months went there for hundreds of millions of £s. It cannot be said that a ½ per cent. differential between the nationalised industries and the local authorities is too great a discrimination, bearing in mind that the banks are basically acting, in practical terms, as lenders of last resort, to local authorities, although admittedly the P.W.L.B. is behind them again. Banks make precious little money out of local authorities during the year, and then the authorities expect to go to the banks with hardly any warning when there is a run on their short-term deposits.
I am very much against the suggestion made in the Report in respect of a centralised borrowing agency for local authorities. The Chancellor raised this point in his Budget speech. I am against the P.W.L.B. being the prime and only provider of funds for local authorities. No consideration whatever is given in the Report to the other side of the argument, 1899 which is far more important. Many of my hon. Friends will consider it to be so. I refer to the independence of local government and how far that can be maintained if there is one central borrowing organisaton or if the P.W.L.B. raises all the funds. How shall we maintain interest in local government if authorities take all their funds from a centralised borrowing agency? I foresee that the Royal Commission must consider the whole question of local authority borrowing and capital expenditure and that they may well suggest 40 or 50 first-tier authorities with greater financial powers. This will clear away the problems of the rural district councils and the urban district councils in the market. We have to go in for a system whereby local authorities will pay the going interest rate in the market with less and less resort to the P.W.L.B.
If central borrowing organisations are required, I should like to see a development of the regional loans bureaux, which are going on very well. The North of England Regional Loans Bureau has performed a most valuable service for local authorities in the North by acting as a clearing house for their funds. Those with surplus funds can place money with the bureau and those which need funds can go there for assistance, thereby saving the commissions which they need to pay in the market. There is a strong argument for a development by local authorities of the regional loans bureaux which would act as clearing houses for their funds. This development would be in line with the need to maintain the full independence of local government and to attract people into it.
I want to be brief, and I will leave out most of the things which I wanted to say. I regret having to do so on this vitally important matter, and I do so only because of the hour at which the Bill is brought before the House. We should have an opportunity to debate at great length these vital matters of capital expenditure by the public sector, and clearly that is not possible tonight.
But there are one or two specific points which I want to make to the Financial Secretary. When we debated the Public Works Loan Bill on 13th May, 1966, I raised certain points with him. I do not 1900 think that it is because I made these suggestions that a great number of them have come about. But there has been good progress. The Government have done an excellent job in abolishing Stamp Duty on local authority borrowing. That is a very sensible move. It never made sense for one part of the public sector to levy a tax on another, creating administrative problems in the middle. This is one improvement in the situation.
Secondly, there has been an interesting move to allow some local authorities, by means of Private Act powers, to issue bills in anticipation of revenue. I fully understand that the Treasury does not want to see the market swamped with the bills of local authorities. I appreciate that point fully. But it would be much more satisfactory, rather than allowing local authorities to seek these powers one by one by means of private Acts, to give an enabling power for a very small amount, say 10 per cent. of the rate revenue, and to allow them to issue bills in these proportions as long as the total amount is kept to a reasonable level.
Clearly, this would lower interest rates substantially for local authorities. The margin between three months money and 90 day bills has been about a quarter per cent. These are ways whereby the cost of money could be brought down. It is not right to say td local authorities, "You can issue bills, but if you wish to do so you must get a special Act of Parliament to give you the power."
About the development of payment gross on deposits, the Inland Revenue, I much regret to say, is indulging in extra-statutory legislation, and I shall be interested to know how the Inland Revenue can say that, in future, with regard to Sections 169 and 170 of the Income Tax Act, it will in future allow banks to pay interest gross on deposits. We know why it should be done, and it is right, but it is unhealthy for Parliamentary democracy that the Inland Revenue should be making ex cathedra statements of this nature.
If this is going on, why should local authorities not be allowed to pay interest gross themselves over one year to nonresidents, because if this were done, much of the foreign money coming into short term deposits and causing so much trouble to the Chancellor, and which led to the 1901 White Paper in 1963, would be enabled as a result of receiving interest gross to flow into long term securities. This is a minor change which could be made to the general benefit of the balance of payments, without difficulty.
I recall that a few weeks ago the Chancellor abolished blocked sterling. I have been pressing for this with the Treasury for about six years. There has never been any real justification for perpetuating the system of blocked sterling, and if he would make a small adjustment to enable local authorities to pay interest gross we could see foreign money flowing into bonds instead of into short deposits and this would be a wholly healthy development so far as non-sterling deposits were concerned.
There is one final matter in which I have a personal interest. The Financial Secretary promised, when we debated the Public Works Loans Bill in May 1966, to look into the £1 million limit on negotiable bonds. The quota has run out, I understand, and nothing has happened. I believe it would be a big rationalisation of local authority borrowing in this country if we could only get down to three separate securities. The first would be a deposit receipt. If we had a deposit receipt up to 364 days, we could then have the negotiable bond as the instrument of borrowing for from one to 30 years. We would get rid of the stock issue altogether.
If only the Chancellor would revise the stock regulations and make them simple, like the bond regulations, there would be much more simplicity in borrowing, and it could be done overnight. We would have bonds used for all securities for one to 30 years with more simple regulations. A bond is almost exactly the same as stock now and we would have the deposit receipt for up to 364 days. Then, finally, there would be bills.
If we were to have this type of development, it would help if local authorities could pay annual interest instead of semi-annual interest. This would rationalise and make much simpler the administrative work in which local authority treasurers must indulge. These are minor matters which add up to a rationalization of local authority borrowing.
1902 Finally—[Interruption.]—and this is my final point. I do not know why hon. Gentlemen opposite seem to be complaining. This is an important subject and I have not spoken for long. I would be quite happy to go on speaking for at least another 20 minutes, and if hon. Gentlemen opposite interrupt me my speech will be that much longer. I am pleased to note that the Chancellor has stayed for this debate.
There is great uncertainty in local government about the future pattern of capital expenditure. Under the National Plan it was agreed that 4¼ per cent. at constant prices would be the growth rate of public sector expenditure. This involved a rate of 8½ per cent. per year for local authorities. For education, highways, roads and the rest, local authorities have made their plans on the basis of an 8½ per cent. rise. Unless the Chancellor tells them what their priorities are to be and what rate of growth they are to be allowed, it will be almost impossible for treasurers to decide their programmes for the coming years. There have been a number of what I consider to have been evasive Answers to Parliamentary Questions about the growth rate of capital expenditure for local authorities. What will it be now that the figure is 3 per cent. for the economy as a whole, the figure which the Chancellor is now forecasting? The priorities must be more clearly defined. I hope that that will be done, and soon.
§ The Financial Secretary to the Treasury (Mr. Niall MacDermot)
I rise to answer—
§ Mr. Deputy Speaker (Sir Eric Fletcher)
Order. The hon. and learned Gentleman has exhausted his right to speak. He may address the House again only with the leave of the House.
§ Mr. MacDermot
I am obliged to you, Mr. Deputy Speaker, for reminding me. With your leave, and that of the House, I will reply to the debate. I know that many of my hon. Friends would wish that I did so in the shortest possible time. However, there are many people outside the House to whom this debate is of considerable importance and, out of respect for the thoughtful speech of the hon. Lady the Member for Finchley (Mrs. Thatcher) on the last occasion when we debated this subject, I will reply to some of the points made 1903 on that occasion. The hon. Member for St. Ives (Mr. Nott), who has great experience of these matters, also made an important speech.
The hon. Member for Finchley went over the history of what has been happening in this sphere since the publication of the 1963 White Paper. I have little quarrel with the facts given in her description of what has happened, although she made a slip in saying that the figure was £318 million for estimated net Exchequer issues to the Board in 1966–67. The correct figure was £398 million. The out-turn for the year, of £515 million, is to be compared with an estimate of £398 million. It is still a substantial excess and one which we must rein in. The result, therefore, is that this year's estimate of £480 million is an increase of £82 million on the estimate, although it is a reduction of £35 million on the out-turn for last year.
The hon. Lady was right in saying that the new quotas of 34 per cent. for capital payments are not akin to, and strictly comparable with, the old quotas of 30 per cent. of the longer-term borrowing requirement. They relate to a different and smaller total, and it is fair to say that the new quotas come out, in effect, at rather less than the old quotas; although I believe that, in practice, they will prove to be only just less. However, she somewhat overstated the matter when she suggested that, by changing the basis of the calculation of quotas, the Government had destroyed the basis of the 1963 White Paper.
As I made clear in my speech when we last discussed this subject, the change of formula does not affect the basis of the White Paper, and it will depend on what the percentage is of the access allowed. The choice of percentage followed from the decision of my right hon. Friend the Chancellor of the Exchequer about what the Budget could afford and that decision was not affected either way by the change of formula.
The hon. Lady commented that although we had had consultations with the local authorities they were perhaps rather cursory. Of course there are inevitable limitations in these pre-budgetary matters, but when we were considering the change of formula this was put to the representatives of the local authorities 1904 and my right hon. Friend the Chief Secretary pointed out that the amount of borrowing from the Board was a budgetary matter and it was difficult to conclude meaningful consultations with the local authorities until the rest of the budgetary picture was clear.
The authorities' representatives first met Treasury officials on 31st March when the proposals for changes in the amounts were put to them. They were not disposed to disagree in principle about the change of formula, but they were disturbed about the amount of access. There was a further meeting on 3rd April which included executive members as well as officers of the local authorities when the Chief Secretary explained the position and that the amount could not be increased.
The deputation argued, as did the hon. Lady, that there had been an element of quid pro quo in the 1963 White Paper and they suggested therefore that the time limit for complying with the restrictions on temporary borrowing should be extended. We accepted this argument and accordingly the time limit for complying with the ceiling on temporary borrowing was extended for a year, to 31st March, 1969. The force of this argument and the decision which flowed from it are surely self-evident, that the basis of the White Paper deal remains in force and has not been fundamentally affected by the change Of formula.
Later in her speech the hon. Lady appeared to be arguing, if I understood rightly, that one result of the change of formula would be for local authorities to get into capital payments things which they had been dealing with by way of revenue payments. If that is her meaning it shows a misunderstanding of the effects Of the change of formula. Under the old formula only capital expenditure financed from borrowing came into the calculation. Under the new formula access is calculated on payments whether they are met out of revenue or from borrowing. The effect of the change of formula would be rather the opposite. One could say that the more capital expenditure authorities financed from revenue, the more of their borrowing quota there could be available to finance borrowing requirements fOr other purposes.
1905 The hon. Lady and the hon. Member for St. Ives referred to the comments in the Report by the Prices and Incomes Board on bank charges. They will not expect me to say more now than that the Government will look into the conclusion reached by the Board on the question of the ½ per cent. differential for interest rates and the suggestion that there could be full access to the Board. That of course will be taken into account in the general review of public sector borrowing arrangements which my right hon. Friend the Chancellor of the Exchequer announced in his Budget Statement.
The hon. Lady, at the end of her speech, asked whether this was not another interim statement of policy. It is too early to say yet what may emerge from the review and what its implications will be for local authority borrowing from the Board. Naturally, once any decisions have been taken, Parliament will be informed and at the appropriate stages there will be consultations with the representatives of the local authorities.
The hon. Member for St. Ives, in the first part of his speech the other mórning, made the point that those local authorities which had already complied with the requirement to keep their short-term borrowing within the 20 per cent. limit were in some way penalised for having been "good boys" by the extension nów granted to other authorities.
I have outlined how the decision came to be made, and I do not think that feeling is held within local authority circles. The fact is that there was no requirement laid down in the 1963 arrangements about the rate at which this objective should he achieved before March, 1968, and local, authorities were perfectly entitled to defer the necessary funding until this year if they preferred to do so. Some may have been unable, through no fault of their own, to achieve the funding earlier.
Consequently, when the decision was forced upon us that we could not expand access in accordance with what was predicted in the 1963 White Paper, I think it followed that so far from creating injustice to those authorities whom the hon. Member called the "good boys", we would undoubtedly be creating an in- 1906 justice to the other local authorities if we were not to grant an extension.
I was criticised last time for not having commented on interest rate matters. I have really nothing new to say on that beyond what is known to the House and which hon. Members have commented upon in their speeches, in particular the removal of the peg which was introduced by my right hon. Friend on 19th January, 1965, in order to mitigate the effect of a 7 per cent. Bank Rate on the housing programme. He now has, from 31st May, decided to revert to rates based on Government credit rates.
As the hon. Lady pointed out, the cost to local authorities of borrowing for housing will now be protected by arrangements in the Housing Subsidies Act which will make good the difference between the current cost of borrowing and 4 per cent. Thus the main reason for holding interest rates on quota loans to the August 1964 level has now ceased to apply and the cost of borrowing for other purposes ranks for rate support grant. The additional cost to the local authorities will therefore be very small. I am grateful to hon. Members for the general welcome they have given to this change.
The hon. Member for St. Ives raised this evening a number of points of importance and of some technicality. I am sure he does not wish me to comment in any detail on them at this stage. I can tell him that some of the matters that he referred to are under consideration at present. For example, representations have been made by local authorities about the restrictions on bill borrowing and these are being considered, but I have no statement to make about his question at present.
With regard to the question of local authority bonds, the Treasury have already had one meeting with representatives of the local authorities about new arrangements for controlling the issue of bonds. This is to be discussed further at another meeting towards the end of next month, and I am sure we can reach agreement on something that will be satisfactory to all concerned. If I may, I will study the other points the hon. Member referred to and, if I find there is any further information I am able to give him about these matters, I will write to him.
1907 I apologise to the House for taking this time at this time, but I hope that with these explanations the House will now be content to give the Bill a Second Reading.
§ Question put and agreed to.
§ Bill accordingly read a Second time.
§ Bill committed to a Committee of the whole House.—[Mr. Charles R. Morris.]
§ Committee this day.